Sustainable Business Perspectives: Circular Economy and Textile Recycling Market Opportunities

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Master’s Degree Programme – Second Cycle

(D.M. 270/2004)

in Business Administration, Finance and

Control

Final Thesis

The Sustainable Business

Perspectives: Circular Economy

and Textile Recycling Market

Opportunities

Supervisor

Ch. Prof. Andrea Stocchetti

Assistant Supervisor

Ch. Prof. Francesco Zirpoli

Graduand

Irene Pasqualotto

Matriculation Number 844139

Academic Year

2014 / 2015

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4.3.2 Canvas Blocks ... 124 1) The Channels ... 124 2) Customer relationship ... 125 3) Key resources ... 125 4) Key activities ... 126 5) Key partners ... 126 Cost stream ... 126 4.3.3 SWOT Analysis ... 128 4.3.4. Action Plan ... 129 Income estimation ... 134 4.4 General assumptions ... 134 4.5 Economic Projections ... 138

4.5.1 First year Income Statement Estimation ... 138

4.5.2 Break Even Point Analysis ... 139

4.5.3 Economic perspectives Simulation ... 141

4.6 Collaterals: Sustainability aspects ... 147

4.6.1 Environmental ... 147

4.6.2 Social ... 147

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Bibliography ... 152

First Chapter Bibliography ... 152

Second Chapter Bibliography ... 154

Third Chapter Bibliography ... 157

Fourth Chapter Bibliography ... 161

Appendix ... 164

A) List of Interviews and analyzed Case Studies ... 164

B) Questionnaire... 165

C) Questionnaire results ... 174

List of Figures

Figure 1 The three pillars of Sustainability ... 12

Figure 2 The six Criteria of Corporate Sustainability. (Source: Model adapted from a previous work by Hockerts (1996, 1999). Source: Dyllic and Hockerts, 2002). ... 18

Figure 3 Relationship between Economic and Environmental performance. (Source: Schaltegger & Synnestvedt, 2002). ... 25

Figure 4 Trade-offs in corporate sustainability. (Source: Hahn et al., 2010). ... 26

Figure 5 Sustainable Management Framework. (Source: personal adaptation from Azapagic (2003), the EU Commission (2009), Bonn and Fisher (2011) and Stocchetti (2012)). ... 27

Figure 6 Product Life Cycle. (Source: Chertow,2008). ... 36

Figure 7 Simplified Circular Economy. (Source: Andersen, 2006). ... 37

Figure 8 Circular Economy Model. (Source: Ellen MacArthur Foundation team; drawing from Braungart & McDonough and Cradle to Cradle). ... 39

Figure 9 Powers of Circular Economy. (Source: Ellen MacArthur Foundation team, 2012). ... 39

Figure 10 Supply Chain Archetypes. (Source: WEF and Ellen MacArthur Foundation team). ... 41

Figure 11 European 2020 Framework... 43

Figure 12 Waste Hierarchy. (Source: Waste Management Directive, 2008). ... 47

Figure 13 Global Value Chain Analysis. (Source: own adaptation from Gereffi et al. 2005). ... 50

Figure 14 Life Cycle Phases. (Source: ISO 14040, 1997). ... 52

Figure 15 Social Life Cycle Assessment’ Stakeholders Categories. (Source: own adaptation from UNEP 2009). ... 54

Figure 16 Production EU-27 Evolution 2000-2010, Index 2000=100. (Source: Adinolfi and Andersen, 2011). ... 59

Figure 17 Employment EU-27 Evolution 2000-2010, Index 2000=100. (Source: Adinolfi and Andersen, 2011). ... 59

Figure 18 Turnover EU-27 Evolution 2000-2010 , Index 2000=100. (Source: Adinolfi and Andersen, 2011). ... 60

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Figure 20 Clothing trade flows between the EU-27 and other world regions, 2012 (Source :

ETC/SCP and EEA based on Eurostat data). ... 66

Figure 21 European T&C Global Value Chain. (Source: own elaboration). ... 71

Figure 22 Environmental impacts related to T&C Product Life Cycle. (Source: EEA, 2014). ... 79

Figure 23 Used and Discarded T&C Flow in Italy. (Source: own elaboration). ... 83

Figure 24 Per-capita kg of textile waste collected by separate collection. (Source: Ispra, 2014). .... 88

Figure 25 Recycling Alternatives. (Source: own adaptation from Palm et al., 2014) ... 92

Figure 26 Involved Economic actors. (Source: own elaboration) ... 96

Figure 28 “Fata SmemoRina” Business Idea . ... 100

Figure 27 Project "Fata SmemoRina" logo. (Source: Own elaboration) ... 100

Figure 29 Reason why to throw away used clothes. ... 106

Figure 31 Willingness to pay. ... 108

Figure 30 Reference person for redesign. ... 108

Figure 32 Competitors characteristics. (Source: Own elaboration) ... 118

Figure 33 Porter’s five forces scheme (Source: own elaboration) ... 119

Figure 34 "Fata SmemoRina" Value proposition and customer segment. (Source: own elaboration) ... 121

Figure 35 Marketing 4p's for "Fata SmemoRina". (Source: Own elaboration) ... 122

Figure 36 Positioning Map. (Source: Own Elaboration)... 123

Figure 37 "Fata Smemorina" Business Model Canvas. (Source: own elaboration). ... 127

Figure 38 SWOT analysis. ... 128

Figure 39 Action Plan Structure. ... 129

Figure 40 Break Even Point. ... 141

Figure 41 Confrontation between the three projections' simulations ... 146

List of Tables

Table 1 Motivations to go green. (Source: own adaptation from Bansal & Roth (2000), Hart & Milstein (2003), Schlange (2006), Parrish (2010), Epstein & Buchvac (2014)). ... 21

Table 2 Social Subcategories. (Source: UNEP 2009, p. 49). ... 54

Table 3 T&C sector branches and complementary industries list and related NACE codes ... 57

Table 4 Key Figures 2013, EU Textile & Clothing Industry. (Source: Euratex, 2014a). ... 61

Table 5 EU-28 Textile Suppliers. (Source: Euratex, 2014a). ... 66

Table 6 EU-28 Clothing suppliers. (Source: Euratex, 2014a). ... 67

Table 7 EU-28 Textile and Clothing Consumers. (Source: Euratex, 2014a). ... 70

Table 8 T&C Sector in Italy. (Source: Istat, 2014a). ... 72

Table 9 Italian T&C Trade data. (Source: Ice, 2014)... 73

Table 10 “Problem analysis” results. ... 107

Table 11 "Redesign service" section results. ... 109

Table 12 "Learning opportunity" section results. ... 110

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Table 14 Segment customer characteristics. ... 112

Table 15 "Fata SmemoRina" potential market size. ... 114

Table 16 Women education levels and age range in the Veneto. (Source: Istat database(c)) ... 115

Table 17 "Fata SmemoRina" Customer Jobs. (Source: own elaboration) ... 116

Table 18 Value Proposition. (Source: own elaboration). ... 120

Table 19 Action Plan. (Source: own elaboration). ... 129

Table 20 Gantt Chart. Legend: Phases = light blue; Tasks/KVD = green; Actions = orange. (Source: own elaboration) ... 132

Table 21 General assumptions. ... 136

Table 22 Income Statement estimation... 139

Table 23 Break Even Point "Number of participants"... 140

Table 24 Positive projection... 143

Table 25 Optimistic projection. ... 144

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INTRODUCTION

The relationship between sustainability principles and the business dimension has become a key issue in the last decades. Especially in recent years, the development of international market trends, such as globalization, offshore-outsourcing and emerging countries rapid growth, accelerated the urgency of integrating economic systems and corporate organizations by adopting wider management point of views, also from the sustainability perspective.

Circular economy could be one of the possible approaches to understand business, environmental and social implications of a product or a sector. Circular economy principles refer to an economic system that efficiently uses resources and does not generate wastes throughout all different phases of a product life cycle. The basic concepts are not new, but in the last period particular attention to this issue has been paid by researchers and institutions.

Therefore, the first part of this work will present the

circular economy’ theoretical framework:

fundamental principles upon which the theory is based will be described, the motivations that fostered European institutions in promoting and eventually financing circular economy initiatives will be explained and contextualized, and appropriate managerial tools that could support principles’ realization will be identified.

Circular economy lenses will be then applied to analyze recent evolution of the European and Italian

Main research themes and questions:

1) Theoretical analysis: Explanation of circular economy fundamentals and individuation of which could be appropriate managerial tools to realize circular economy principles.

2) Theoretical application: Use of circular economy lenses to analyze the Textile and Clothing industry’

evolution.

3) Empirical analysis

(qualitative): Formulation of a general model regarding the state of the art of Italian T&C recycling branch and potential business opportunities related to circular economy in the sector. The framework should also map involved economic actors.

4) Empirical analysis

(quantitative): Investigation of how to concretely take advantage of circular economy possibilities in the Italian T&C sector.

QQuaExploration of which is the market dimension and the relative potential exploitation of one of the

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textile and clothing sector. The observation of interesting recycling initiatives promoted by fashion brands (e.g.: H&M “Close the loop project1”) has been the starting point for this specific, in-depth analysis of the T&C industry. Therefore, the sector will be analyzed from a wider perspective, meaning that economic, environmental and social effects of all value chain stages will be considered.

The empirical analysis of this work will try to provide two contributions: first, a general model that should describe which are current options to reuse and recycle used textiles and garments in Italy and should map who are the economic subjects involved in close-the-loop activities. Second, the quantification and strategic planning of one of the market possibilities.

Therefore, T&C reuse and recycle options and future business opportunities will be more in depth investigated, focusing on the state of the art in Italy, in order to formulate a reference model (Qualitative research). Then, the quantitative-empirical research will explore market demand and offer of one of the emerged business possibilities and which would be an appropriate strategy to concretely take advantage of it. The expected results consist in the quantification of the potential market size and in the development of a consistent business model, and relative plan, to generate value.

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H&M “Close the loop” initiative consists in giving customers who bring used clothes to H&M shops a discount ticket on new acquired garments (H&M Website).

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CHAPTER 1. THE RELATIONSHIP BETWEEN BUSINESS AND

SUSTAINABILITY

In the last decades the relationship between companies and sustainability issue has been contradictory, since firms have managed their impact on natural ecosystems and society in very different ways. Indeed, on one side, sustainability principles’ implementation for businesses means costs, investments, changes and efforts for innovation. On the other side, sustainable approach could be seen as a strategic opportunity for growth or as an interesting way to catch attention, and relative profits, of costumers who care more about environment.

Nowadays the phenomenon of sustainable business has become more complex and there are more than two alternative perspectives. Many different factors, such as economic and financial crisis, fast growth of emerging countries, higher competition at the global level and growing customer awareness, influence decisions and have to be analyzed in order to better understand the actual context in which enterprises operate. Thus, companies are facing challenges, that seem difficult to solve through traditional business models. In particular, new perspectives and patterns for a more sustainable and integrated economy have been developed and are now quickly diffusing because of their effectiveness.

This chapter will provide a brief explanation of sustainability principles and their historical development, with a specific focus on their implications on companies activities. Then, motivations and organizational drivers towards sustainability will be analyzed, together with possible approaches to related changes. This general introduction will serve as background to better understand the link between business and sustainability and will present the fundamentals from which the new sustainable strategies, that will be further described, derive.

1.1 Definitions and Dimensions of Sustainability

Since the awareness about environmental and social issues has risen, several definitions have been formulated to describe emerged sustainability concepts,. The increasing amount of new expressions is however dispersive. Terminology in the field of sustainability has become crucial in order to avoid confusions and misconceptions (Glavič and Lukman, 2007).

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For this reason, it is fundamental to clarify the meaning of important terms that are going to be used in this work. The following definitions have been selected and chosen as more significant to offer a general idea of the field that will be examined.

1.1.1 Principles of Sustainability

The concept of sustainability has originally been expressed in the famous and most diffused definition of “sustainable development”, described as a “development that meets the needs of the present generations without compromising the ability of future generations to meet their own needs” (WCED 1987, p. 43).

In this wide definition, some key ideas related to sustainability can be identified. First, growth and improvements of life’s quality remain central: through the acceptance of the intrinsic dynamism of world mechanisms, a continuous development is affordable, but limitation of resources and environmental capacity entail necessary researches to find better ways and technologies that guarantee life. Second, the long term perspective is embodied in the attention for future generations of every kind of living beings, included humans, animals and plants, pursuing intergenerational equity. Finally, world has to be seen as a system of interacting and interdependent parts, linked by exchanges of matter, energy and information, and narrow views should be avoided because they underestimate real effects. As a result, space and time are connected, which implies to consider consequences of people activities simultaneously both in the spatial dimension, without fixed boundaries, and the temporal one, knowing that the present time is decisive for the future time.

There are then two distinct approaches related to sustainability . On one hand, “hard sustainability” approach assumes that human capital cannot substitute natural capital, the last one being a stock of limited natural resources, continuously depleting. On the other hand, “soft sustainability” states that the replacement between the two capitals is possible, especially improving technological abilities (Becker, 1997).

1.1.2 The Three Pillars of Sustainability

Three main issues are involved in sustainability: economic growth, social equity and natural systems carrying capacity. These three aspects are interconnected, but their systemic integration in the business world is still in the development phase.

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Actually, the need of harmony between

economy, society and environment has always been recognized by different cultures. It is almost a paradox that the environmental issue has become important only in the last period, since every kind of human activity has an impact on natural

eco-systems. In particular, economic

activity is the mere transformation of raw materials and people labor in marketable outputs within the environmental context. Anyway, the actual background of global

industrialization, advanced technology and information society modifies the approaches and actions that have to be taken to deal with sustainability (International Institute for Sustainable Development, 2002).

The expression “green economy” stems from the idea of an economy based on “improved human well-being and social equity, and significant reduction of environmental risks and ecological scarcities” (UNEP, UNEP Website(a)),. This is not the unique proposition and, among years, this term has assumed a wide range of meanings, since its general definition could include green policies as well as green business strategies. In any case, with the term “green economy” all the aspects that refer to the relationship between environment and economy are considered.

1.1.3 Corporate Sustainability

As it will be further explained, for a long time sustainability has been seen only from a macroeconomic perspective, almost ignoring managerial implications and not considering the micro level approach. The specification of “corporate sustainability” maintains substantially the general sense of sustainability described above , but at the same time differs from it because for a company the competitive and organizational contexts are predominant (Stocchetti, 2012).

Therefore, at a business level, sustainability could be defined “as meeting the needs of a firm’s direct and indirect stakeholders (such as shareholders, employees, clients, pressure groups,

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communities etc.), without compromising its ability to meet the needs of future stakeholders as well” (Dyllick and Hockerts 2002, p. 131).

The practical goal for enterprises is then “to minimize the impact of their activities on the environment and on social discomfort, without sacrificing profitability” (Stocchetti 2012, p.34), and to develop a long run vision which considers the economic, social and ecological dimensions simultaneously. Therefore, managers have to adopt new strategies to meet today’s stakeholders needs and protect human and natural resources for the future at the same time.

According to Dyllick and Hockerts (2002), an enterprise could be sustainable:

1) Economically, when its economic capital (financial, tangible and intangible goods) is managed to ensure positive cash flows and a above average return on investment to shareholders;

2) Environmentally, when it consumes natural capital, which consists in both renewable or non-renewable resources and ecosystem services (e.g. plant and animal reproduction), at a rate below the natural reproduction, or at a rate below the development of substitutes and it takes care about the carrying capacity of the surrounding ecosystem;

3) Socially, when it adds value to the local community improving relationships with different stakeholders by conducting business in respect of human rights (societal capital), and it fosters individual competencies to grow (human capital).

These authors also assume that the three types of capital are rather complementary then substitutes, because not every kind of natural and social resources can be replaced by economic capital. Other assumptions are also the irreversibility of natural and social capital depletion and the non-linearity of environmental processes, which means that negative consequences could suddenly occur after an unknown threshold is reached. These considerations reflect the hard sustainability thinking, but the possibilities offered by technology have to be included in the reasoning as well.

Even if for a long time the economic part has been seen as separated from the other two and considered decisive for corporate survival, nowadays the interdependency and the need of integration between the three dimensions are recognized as crucial to achieve strategic advantage. In this work, the focus will be mainly on the linkage between corporate strategies and environmental issues.

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1.2 Evolution of Sustainability in Management

Since the early nineteenth century, the increasing openness of trade and the financial, capital and people movements at international level have intensified the environmental tensions, becoming particularly intense, especially after the Second World War when western countries experienced high economic growth rates. Thus, initially sustainability issues mainly concerned natural ecosystems’ problems caused by businesses.

Thanks to scientific researches and evidences about climate change and global warming at the end of the 1960’s, the negative effects on the environment of economic activities has been acknowledged and the concept of “sustainable management” has slowly emerged.

Hart and Milstein (2003) have organized the noteworthy motives of sustainability development, individuating four main drivers:

1) Increasing Industrialization and the related high rates of pollution, resource consumption and waste creation;

2) Proliferation and intercommunication of civil society stakeholders, such as non-governmental organizations connected with environmentalists, particularly helped by information technology that has enabled principles diffusion;

3) Disrupting and sometimes unexpected improvements of technology in new fields, like nanotechnology and renewable energies;

4) Population, poverty and inequality increases caused by globalization.

1.2.1 The Global Dimension of Environmental Problems

The recognition of the environmental issue as a global problem has been the starting point, since spill-over and consequences of polluting actions don’t remain into politically defined national boundaries, but spread all over and could potentially damage entire ecosystems.

This reason has led Sovereign States to collaborate internationally to find together possible solutions. Implications on companies, anyway, took long time before becoming effective: delays and inertia were unavoidable, given the implicit threat to business interests and given the macroeconomic perspective which has dominated the sustainability issue, through a sort of hegemony, putting in shadow the actual relevance of micro-level sustainability policies.

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In 1972 a group of scientists, government officials, economists known as the “Club of Rome”, published the book “The Limits to Growth”, which scientifically demonstrated how global resources, in a near future, would not be able to satisfy the needs of a fast-increasing population. In the same year, during the Stockholm Conference on Human Environment, the United Nations decided to involve world citizens in acting responsibly towards environment, declaring principles which should “inspire and guide people of the world in the preservation and enhancement of the human environment” (UN, 1972). Therefore, UN established the United Nations Environment Program (UNEP), an international, stable institution that promotes ”the wise use and sustainable development of the global environment” and represents the Environmental Department of the UN (UNEP, UNEP Website(b)).

Attention on sustainability has highly increased after the publication, in 1987, of the World Commission on Environment and Development report “Our Common Future”, where the previously mentioned specification of “sustainable development” has been defined.

In 1992, at the earth summit “United Nations Conference on Environment and Development (UNCED)” in Rio de Janeiro, another important organism was established: the United Nations Framework Convention on Climate Change (UNFCCC). Its main goal is to coordinate the cooperation between countries to limit average global temperature increases and the resulting climate change (UNFCC Website).

With the UNFCCC began then a long process of international cooperation and research to find possible instruments, mechanisms and solutions for environmental problems. One of the most important agreement signed has been the Kyoto Protocol in 1997, that committed 37 industrialized countries and the European Union to set and respect CO2 emissions reduction targets compared to 1990 levels over the period 2008-2012. The Protocol legally bound only developed countries (Annex I Party) because of their greater responsibility regarding current high levels of greenhouse gas emissions, stating the central principle of “common but differentiated responsibility”.

The Kyoto Protocol consisted in a compliance system of flexible market-based mechanisms, which should internalize environmental costs, recognized as a negative externality. At that time, three possible measures had been provided. The first was the creation of an Emissions Trading System

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(ETS), that set levels of allowed emissions and allowed countries with excess capacity to sell it. The other two mechanisms were connected with the possibility to develop emission-reduction project in developing countries (Clean Development Mechanism), or in other industrialized countries (Joint implementation), earning in this way saleable certified emission reduction credits or units which could be counted towards meeting Kyoto targets.

Over years, various other programs have followed and big investments have financed projects aiming at substituting polluting devices and routines (Adaptation Programs) or to support research and development for new solutions to be less polluting (Mitigation Programs). Nevertheless, at the end of the Kyoto Protocol commitment period in 2012, no binding agreements were signed and no fixed goals were set during the Rio Plus 20 UNFCC Convention. Therefore, the result of decades of meetings, negotiations and multinational treaties related to sustainability is a complex system of nice principles and environmental laws, that strives to mediate interests and point of views of a lot of actors, but has difficulty in concretely changing behaviors.

Presently, UN agencies recognize that sustainability could imply huge costs, high risks and large-scale actions that are feasible only at a global level. For these reasons, the latest programs promoted by UNFCC, the “Climate Finance” and “Development and Transfer of Technology”, which aim to foster cooperation between countries through mechanisms that facilitate financial resources sharing for R&D projects and transfer of acquired technological knowledge.

It is remarkable that most of the measures above described committed Countries in acting against environmental pollution, since they are considered responsible for public goods involved, such as nature preservation and health security, and they have the legislative and executive power required to change people habits. National Governments have been free to implement the best measures they thought to reach their targets, therefore only in a second moment implications involved individuals and companies.

Indeed, the tools suggested by international regulators to foster green growth at the micro-level influenced firms and consumers behaviors in a more light and indirect way. The possibilities have been (World Bank, 2012):

1) Incentives: using market base mechanisms, for instance price instruments (taxes and subsidies), or quantity ones (tradable permits schemes, i.e. for CO2 emissions);

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2) Information: improving green accounting, tackling firm behavioral biases and enabling public pressure through conscious information diffusion;

3) Imposition: levering upon norms and legislations.

1.2.3 From Macro Perspective to Micro Approach

As seen in the previous paragraph, since the beginning the policy-based or macro-level perspective approach has been dominant, providing concepts, principles and guidelines for regulations that are insufficient yet. It is evident that a unique approach is not enough effective and the micro level has to be necessary considered and integrated.

The micro perspective involves individuals and enterprises, consumers and producers, that are responsible for the largest part of human imprint on the environment because of their behaviors and habits. Even this approach requires global participation and contribution, since the convenience stands at the global level.

In particular, the focus of this work will be on “the business link to sustainability”. Indeed, for a long time no appropriate attention has been paid from environmental institutions to business dynamics, especially regarding actual implementation of sustainability principles, like individual motivation or business processes. In parallel, the majority of companies and managers have deliberately ignored the damages on environmental ecosystems and the irreversible degradation of natural resources, whose they were responsible for, and they have also boosted indiscriminate consumption and waste creation models (Stocchetti, 2012).

The recent, but rapid, shift of environmental responsibility from local authorities to business activities pushed corporate management to action. In effect, over the last decades, implications on private companies have almost become a priority. The main causes are connected with the fact that:

 Environmental institution regulations have become effective;

 Customer environmental awareness has increased, thanks to critical mass media communications;

 Serious environmental catastrophes caused by corporations, such as oil spills or entire area contamination, occurred;

 and Environmentalists and animalists have given rise to doubts about the way firms conduct their activities.

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Beyond obligations and urgency, a spontaneous and voluntary acknowledgement of corporate responsibility has developed in parallel and it is known as “Corporate Social Responsibility” (CSR). It moved enterprises’ focus from shareholder value creation onto stakeholders relevance, consideration and participation, including also social and societal issues (Hart and Milstein, 2003).

Even though industrial systems often determine environmental depletion and social concerns, they are also source of development and wealth for people (Azapagic, 2003), therefore the spillover of a sustainable approach to business management is both a challenge and a good opportunity for managers to adapt and improve strategies, integrating through a holistic method the innovative criteria of sustainability that should guide all daily decisions (Stocchetti, 2012).

1.3 Corporate Answers to Sustainability Call

When it comes to Corporate

Sustainability, three cases,

corresponding to the three pillars and capital of sustainability, have to be simultaneously and equally

considered: the business, the

natural and the social one (Dyllic and Hockerts, 2002).

The “business case” refers mainly to

the efficient use of natural

resources (eco-efficiency, calculated

as the relation of ⁄ - Schaltegger and Sturm,

1998-) or social capital (socio-efficiency, calculated as the relation of

⁄ -Figge and Hahn, 2001-) and the possible profit and financial opportunities offered by the adoption of a sustainable approach. From this perspective, the contribution of companies to sustainability is seen as instrumental to make more profits, reduce costs and improve brand reputation, thus without compromising economic performances. Until recent time, the focus of management research and literature have been mostly concentrated on this “case”, trying to demonstrate the achievable profitability and win-win solutions, and has led to relative improvements rather than considering the whole implications.

Figure 2 The six Criteria of Corporate Sustainability. (Source: Model adapted from a previous work by Hockerts (1996, 1999).

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Instead, for the “natural case” the main goal is to produce better environmental good. Regarding to the link between environment and business, eco-effectiveness is the appropriate criterion. It regards, for instance, the relativity of polluting behaviors respect to surrounding eco-systems and carrying capacity or the possible negative correlation between higher resource productivity (positive for efficiency) and nature degradation (negative for effectiveness). On the other hand, sufficiency, related to nature and society, is a subjective parameter that should indicate the reasonable amount of natural resources per person. Actually, many authors suggest that the latter issue is about individual choice and not corporate responsibility, but studies in this field are still missing and necessary in order to better analyze this concept.

Finally, two criteria concern the “social case”: socio-effectiveness, intended as the conduction of business focused on an absolute positive social impact, and ecological equity, that considers the problem of natural capital distribution and consume respect to present and future generations.

Following this approach, enterprise managers should constantly try to Integrate the three cases, by improving economic, environmental and social performance at the same time, even if it seems impossible to reconcile with short-term financial pressures or profits delivery demand from shareholders, aspects that are usually considered as priority. Indeed, sustainability approach requires huge efforts for modifying and innovating firm strategies and it entails a kind of revolutionary change, which is often thwarted by organization change-resistance. However, the real challenge for business management is practical implementation of principles (Epstein and Buchvac, 2014).

1.3.1 Types of Green Industries

Initially, it is necessary to distinguish the two main groups of industries that deal with sustainability.

The first type consists in firms that are purposely born with an environmental or social core value, recognizing sustainability in their mission. Parrish (2010) defines this kind of entrepreneurship as “sustainability-driven”, since it embeds environmental and social purposes and it positions the related benefits on the same level of economic performance. Following this definition, nature and people are seen as ends in their own for the generation of wealth. Another possible name for this typology, formulated by Schlange (2006), is “ecopreneurship”, that refers to companies committed to the modification of economic and management systems through sustainability

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ideals diffusion. Some examples could be businesses that deal with renewable energies, biological agriculture and food distribution, natural cosmetics, recycling, environmental protection services and green mobility. Most of them were probably born after first signals and acknowledgment of the “environmental case” for businesses, either because they believed in environmental values or because laws boosted their creation. In this case, their own existence could prove that they can survive since a market exists, even though public incentives and subsidies have probably distorted both supply and demand side.

In contrast, the other typology, which is composed by the majority of existing industries that offer every kind of products and services, does not follow sustainability principles as its reason to exist. However, firms inevitably impact on the environment through their polluting production and distribution processes or on local communities because of occupational and wealth issues. Enterprises of this second group follow the conventional way of doing business, that is a “self-interested, profit-seeking” approach (Parrish, 2010), attributing more importance to the “business case” of sustainability, especially profitability and financial returns. Modifying their way of thinking and operate is harder, but actually the real challenge is to guide this kind of companies towards environmental sustainability.

1.3.2 Reasons to go green

Management literature has been particularly prolific regarding the research on which kind of motivations could drive enterprises to go green, thus focusing on the environmental dimension. After a deep, and hopefully exhaustive, review of different surveys, some common points were individuated. The attempt of this paragraph is to summarize and systematically organize the various theoretical and empirical findings.

The basis upon which the re-organization has been founded is the Bansal and Roth pattern about “Motivations for Ecological Responsiveness” (2000), that is grounded on an empirical research and identifies three main reasons: legitimation, competitiveness and social responsibility. For each theme, different causes have been individuated, that could have different origins and could be affected by internal factors or external influences (Epstein and Buchvac, 2014). Moreover, each specific cause has a main objective to achieve, which entails the implementation of concrete actions (named “Responsive Initiatives”) and could lead to remarkable benefits (Bansal and Roth, 2000). From a strategic point of view, the possible approaches that characterize enterprises

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reactions to motivation impulses have been classified in four typologies: passive, when the cause is considered a constraint; adaptive, if it responds to stakeholders requests; reactive, when it is seen in competitive advantage terms and proactive, if the company answer goes beyond compliance and mere economic incentive, since it is guided by social responsibility and ecological values. Finally, in the last column, it has been specified if the peculiar motivation and related response is correlated more to sustainability-driven enterprises thinking or conventional one. The following table has been created to better understand the involved dimensions.

Table 1 Motivations to go green. (Source: own adaptation from Bansal & Roth (2000), Hart & Milstein (2003), Schlange (2006), Parrish (2010), Epstein & Buchvac (2014)).

MOTIVATI ON CAUSE TYPOLOGY INTERN / EXTERN MAIN OBJECTIVE RESPONSIVE

INITIATIVES POSSIBLE BENEFITS

STRATEGIC APPROACH SUSTAINABIL ITY-DRIVEN / CONVENT. LE G ITI M A TIO N Government Regulation (Law and Market-base Instruments) External - Firm Survival - Pertinence Improvement of actions within set of regulations - Compliance with norms and Application of economic instruments - Important role of Audit - License to operate - Long term sustainability - Avoidance of costs and risks of non-compliance Passive / Imitative Conventional Stakeholders importance and pressure External - Maintain company brand Reputation - Environmental committee creation and environmental managers - Role of Reporting - Immediate response to emergency cases - Stakeholder increased consciousness Adaptive Conventional C O M P ET ITIV ENE SS Sustainable economic convenience Internal - Economic and Financial Opportunities Exploitation - Eco-efficiency - Technological Innovation

- Product Value Chain Synergies - Industrial Symbiosis - Costs reduction - Risk reduction - Stream efficiency - Resource sharing - Resource Perpetuation Reactive / Proactive Both Possible Profitability Internal - Economic and Financial Opportunities Exploitation - Eco-products - Eco-label development - Green marketing - Revenues/Profit margin Increase - ROI increase Adaptive/ Proactive Both Competitors Actions External - Maintain or Increase Competitive Advantage and Market Position - Other competitors Best Practices Imitation - Differentiation

-Larger market share - Higher Investor attractiveness Reactive Conventional SO C IA L R ES P O NS A B IL ITY Responsability Ackowledgeme nt Internal - Worthy Contribution towards sustainable development - Environmental Programs and Action Plans Implementation - CSR instruments

- Societal and Social Satisfaction Adaptive / Proactive Both Management Commitment Internal - Implementation of sustainability culture - Business strategy and operations improvements - Satisfactory strategic and operational Outcomes - individual satisfaction Proactive Sus Moral Mandate

and Obligations Internal

- Social goods preservation - Ecological values diffusion Individual self-sustained initiatives - Job creation - Ethical investors - Prevent Degradation - Good feelings Proactive / Independe nt Sus

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Note that, although here motivations are distinguished, in reality companies manage business unconsciously following a mix of them. Furthermore, undoubtedly the list of possible initiatives here presented is not complete, since enterprises are free to decide the most appropriate measure to implement, often on a voluntary base and without fixed standards to compulsorily follow, thus they could act very differently. As previously specified, the table aims at giving a panoramic view and general understanding of the main reasons that drive companies towards sustainability.

1.3.2.1 Legitimation

The motive of legitimation derives from two possible external inputs: government regulation obligations, implemented through norms and market based instruments application, or stakeholders pressures (Bansal and Roth, 2000; Hart and Milstein, 2003; Epstein and Buhovac, 2014). Regarding legal duties, the main goals are: firm survival and improvements of enterprise responses appropriateness within the set of established rules. In this case, the most diffused actions that conventional firms adopt are to be in line with legal requirements and to audit compliance. These initiatives permit companies to keep operating with a longer term perspective and to avoid costs and risks of non-compliance, such as fines, penalties and inspections.

On the other side, stakeholders pressures have increased resonance and their consideration is becoming crucial to maintain positive brand reputation. Always more frequently, firms destine specific departments or persons to the environmental issue and they should develop stakeholders networking and participation (Bansal and Roth, 2000). Furthermore, important improvements have been done in Corporate Social Responsibility reporting, especially related to Sustainability balance sheet formulations and contents. Enterprises benefit from this adaptive approach because they are more prepared in case of particular emergency and stakeholders are more informed.

1.3.2.2 Competitiveness

Competitiveness refers to internal factors correlated with ecological costs and benefits evaluations and to external influences from the competitive context (Schaltteger and Sturm, 1998; Bansal and Roth, 2000; IISD and WBCSD, 2002; Hart and Milstein, 2003; Epstein and Buhovac, 2014). Actually, the possible economic and financial advantage given by the exploitation of sustainable profitability opportunities and competitors actions are often the main and most considered drivers towards sustainability.

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Many authors have demonstrated the economic convenience of eco-efficiency initiatives, such as pollution prevention, waste management and environmental management systems (EMS), the latter being a set of management instruments that guide resource allocation, responsibility assignments and evaluation procedures for daily business practices (Glavič and Lukman, 2007). For sustainable-driven companies, the eco-efficiency logic is translated in the “resource perpetuation” concept, that implies protecting and maintaining the quality of natural and social resources through sustainable consumption (Parrish, 2010). Together with technological innovations, synergies among the product value chain and industrial symbiosis (the last two will be hereinafter analyzed), all these actions lead to remarkable cost reductions, in terms of lower health, safety, energy and labor expenses; financial risk decrease; efficiency improvements along the whole process of intermediations of the product and benefits from resource sharing with companies located nearby.

The positive profit-side effects are both the consequence of costs reduction, as it increases profit margin, and revenues growth, which is achieved by taking advantage of the expanding amount of environmentally-aware customers that demand for eco-products and eco-labels development. In this direction, some institutional authorities or private consulting agencies provide the possibility to certificate ecological production processes or materials, under certain specific standard conformity, to gain trust from clients. Financially, both cost and benefit progresses enhance return on investment rates.

Mainly conventional enterprises are forced also by competitors actions that threaten their competitive advantage and market position. In this case, two different ways to react are possible: either to imitate other’s best practices (follower strategy) or to differentiate product portfolio with ecological products. Thus, firms are able to obtain larger market shares and attract more investors.

1.3.2.3 Social Responsibility

Social responsibility motivation is originated firstly by firms recognition of social importance of the environmental problems. This concern leads to the voluntary desire to contribute for sustainability development. Initiatives could include environmental programs, action plans implementation or use of CSR instruments.

Giving importance to social responsibility is the first step to rise discussion and to let companies question themselves about what they concretely could do at the societal (enterprise organization

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and governance) and social (entire stakeholders community) level to satisfy and privilege worthy recipients (Parrish, 2010).

Managers commitment, that comes from individual ecological beliefs, is fundamental too and could be an incredible driver and internal motor for changing companies’ way of conducting business. The goal is challenging, since it refers to the integration of sustainability culture within management and operation systems, by trying to balance the competing objectives of the economic, environmental and social cases. Actions thus go from business strategy design, through for instance “Corporate Sustainability Management System” (Azapagic, 2003), or decision-making criteria indications, such as “Qualitative Management” that requires to consider outcome effects in terms of “better” than “more” (Parrish, 2010), to practical daily activities and control. The expected benefits are multiple, since they could be obtained from various satisfaction outcomes objectives, and could even lead to better general performances which can compensate individual managers efforts.

The last and probably most admirable motive is “Moral Mandate” (Schlange,2006; Parrish, 2010), that is also difficult to recognize between false slogans or statements. Schlange (2006) individuates the main objective in the mere pleasure of doing something good for preserving socially significant public goods, such as environmental beauty, and diffusing ecological values. Frequently, sustainability-driven entrepreneurs act by self-sustaining particular initiatives, like environmental education, donations or local community promotion and development. This approach gives them the possibility to create new jobs, obtain ethical investors attention and capitals, prevent regional and community qualitative characteristics degradation and feel good because they have done the right thing (Bansal and Roth, 2000) to contribute to environmental progress.

1.3.3 The Relationship between Economic and Environmental Performance and Trade-offs in Corporate Sustainability

As already mentioned, the firm real interest is to consider whether sustainable business approaches implementation could be economically convenient or not. This has actually been the main focus for a long time and it is called “business case for sustainability” or “win-win paradigm” (Dyllick and Hockerts, 2002; Salzmann et al., 2005). According to this paradigm, business, nature and human dimensions are harmonic between each other and the simultaneous integration of the

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three aspects should pay off. Thus, economic performance has been the key decision driver, while environmental and social issues have been considered the dependent variables.

Nonetheless, Schaltegger and Synnestvedt (2002) stated that the relationship between environmental and economic performance is not necessarily positive or negative, since it is influenced by the way the firm wants to achieve a specific environmental target level. Moreover, the environmental goal depends on many different factors, such as national regulations, cultural mentality, companies types and sizes, stakeholders pressure and market liquidity.

The authors developed a possible model of representation of the relationship between economic success and environmental protection, where, after having decided an appropriate efficiency-environmental management system (transformation curve’s incline), it is possible to find the most economically convenient amount of environmental protection. Point A in Figure 3 should then represent the comparative valuation of both business and natural performance objectives and the threshold level from positive to negative relation.

In the research review about the various “business case approaches” that tried to demonstrate or disprove the financial payoffs and economic rationale of corporate sustainability made by Salzmann et al. (2005), three possible typologies of relationships are presented: positive, neutral and negative. The relationships have been studied from a theoretical point of view or from the empirical one, through case studies, quantitative analysis (such as portfolio’ performance comparison and multiple association of financial and environmental measures), event studies, and descriptive research of managers’ attitudes. For instance, in their analysis, King and Lenox (2001) found statistical evidences of the positive association between pollution reduction and financial gains, but could not say with confidence the direction of causality and the actual correlation among the two variables. Indeed, Salzmann and his co-authors (2005) criticize the fact that many studies do not provide convincing evidences, because sometimes the methodology is inappropriate, lacking of rigorous data selection or valid assumptions, or results are inconclusive.

Figure 3 Relationship between Economic and Environmental performance. (Source: Schaltegger

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In conclusion, they underline the complexity of the business case of sustainability and its relativity respect to the other cases.

Furthermore, the win-win logic of simultaneous integration of the three sustainability dimensions results too restrictive, since it does not include eventual conflicts between desirable economic, ecological and social goals in the analysis. Therefore, in order to concretely contribute to a real change in sustainable business conduct, trade-offs have to be considered, referring to

“situations in which corporate

contributions to sustainable

development can only be achieved if one accepts a compromise between at least two sustainability aspects that are in conflict with each other” (Hahn et al. 2010, p. 220). For example, a small loss

in economic performance can substantially improve environmental or social outcomes, while higher profits can hide serious and long lasting consequences on nature or people wealth. In the framework for trade-off in corporate sustainability proposed by Hahn et al. (2010, see table above), possible conflicts are identified respect to three dimensions: outcomes, meant as actual effects of corporate activities; process, referring to business practices and time, in relation with intergenerational aspects. Moreover, trade-offs could manifest at four different levels: individual (i.e. managers), organizational (i.e. single company), industry (i.e. group of firms, sectors) and societal (i.e. society). Each intersection individuates where conflicts could potentially occur, but further empirical research and management guidelines are still required, since this field of study has developed recently.

Figure 4 Trade-offs in corporate sustainability. (Source: Hahn et al., 2010).

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1.3.4 Strategic Models to Implement Sustainability

Given the reasons and possible trade-offs that the sustainable approach entails, the main difficulty remains translating principles in decision-making guidance for daily practices and in concrete actions. However standard solutions cannot work for every kind of enterprise, since the ability to contribute towards sustainability goals making a difference varies by sector and organization. It is fundamental, however, to enhance management systems by supporting organizations during the delicate momentum of cultural reorientation and procedures refinement, that entails challenges related to corporate governance, strategic decision-making address, business planning, performance control systems and many other fields (IISD, 1992), and by providing them effective guideline-frameworks to follow. Therefore, a system approach is necessary and helps at creating a “sustainable management framework” that is here presented as a re-elaboration of possible models formulated by Azapagic (2003), the European Commission (2009), Bonn and Fisher (2011) and Stocchetti (2012).

Figure 5 Sustainable Management Framework. (Source: personal adaptation from Azapagic (2003), the EU Commission (2009), Bonn and Fisher (2011) and Stocchetti (2012)).

The starting point is to define firm’s mission regarding main sustainability issues for the company, that should embrace stakeholder expectations and introduce related policies and principles (Azapagic, 2003). Connected with the mission, is the development of a vision about sustainable beliefs and priorities for the future, incorporating economic, environmental and social aspects,

1) Sustainability Mission and Vision

Definition 2) Strategic Decision-making Process Guidelines 3) Strategy Content: Corporate, Business, Functional 4) Initiatives and Action Plans Implementation 5) Control System for

Sustainability Structure and Function 6) Communication and Reporting 7) Review and Corrective Actions Individuation

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that should guide decision-making processes among previously discussed trade-offs (Bonn and Fisher, 2011). Mission and vision should be supported by shared organizational culture and rules and they should also be aligned with business strategy (Azapagic, 2003).

The decision-making process concerns the way choices are taken and it is created, firstly indentifying strategic threats and opportunities and analyzing underlying causes through a scan of available environmental data and secondly building guidelines to support managers’ thinking. The result of the decision making process is the strategy content, that refers to a set of strategies for the three company levels (Bonn and Fisher, 2011):

1) Corporate-level: refers to the overall organization scope and value added creation. It includes decisions about product or market differentiation, geographical covering, partnership and acquisition strategies and resource allocation between different business units.

2) Business-level: is about the individual strategic business unit, industry sector or market segment in which enterprise operates and compete. It could imply existing products modifications or new sustainable products development, therefore the role of technology in this case is fundamental and often it requires life-cycle assessment to analyze product impact at different product-life stages.

3) Functional-level: is the managers guidance in operation, finance, human resource and marketing areas. It entails relevant indicators definition, performance measurement and control systems.

Then, concrete initiatives and action programs can be planned, by setting specific targets, identifying responsibilities and assigning personnel and resources to specific objectives. During the implementation phase, Stocchetti (2012) proposes a structured Control System for Sustainability (CSS) that should constantly measure performances with respect to highly impacting economic, environmental and social variables and should also monitor eventual gaps between expected and actual results. An appropriate control system permits indeed to underline interrelationships between processes and areas and to rank the importance of the effects derived from various activities on sustainable variables. Consequently, priorities and related degrees of efforts can be individuated, supporting in this way managers in dealing with the large amount of trade-offs that could emerge from indicators analysis.

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Lastly, it is important to communicate sustainability policies and progresses both internally to firm’s employee and externally to important stakeholders, with the aim of increasing their awareness.

Despite an established CSS certainly helps at providing more rigorous and objective information about corporate environmental performance; social accountability, assessment and disclosure still present trust problems that require audits, verification and validation (Laufer, 2003). Already Greer and Bruno (1996) suggested to look critically at the real environmental behaviors of companies, instead of only read what they write on their websites or CSR reports. Following this recommendation, many environmental NGOs, such as Greenpeace, began to pay attention to this issue, arising a great debate about “greenwashing”. This term has often been misused, but actually the phenomenon of intentionally misleading stakeholders by “telling the truth, but not the whole truth” (Lyon 2011, p. 9), has recently diffused, increasing the creation of confusion and deceptions about corporate ethical commitment (Beder, 1997). The strategy of greenwashing concerns eco-products, eco-labels, eco-certifications or other types of environmental communication, that should be read and considered with particular caution.

The final review and eventual corrective actions foster a continuous redefinition of corporate sustainability strategy, closing the loop and letting the process restarting and improving (Azapagic, 2003).

The EU Eco-Management and Audit Scheme (EMAS Website), developed and promoted by the European Commission in 2009, combines together the seven steps just presented and supports all kind of organizations in evaluating, reporting and improving their environmental performance, credibility and transparency. Furthermore, participants of the program could receive expert advice about eco-friendly practices and could obtain the EMAS registration, if they comply with all the required stages. The requirements consist in an initial environmental review, the adoption of sustainability policies and related action plans, the establishment of the environmental management system, a final audit and the provision of an environmental statement about the actual performance, that must be accredited and verified.

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1.4 Conclusions

The realization of sustainability principles entails implications on corporate organization, management and strategies. Prompted by different motivations, nowadays companies have taken on their share of environmental and social responsibility adopting different approaches. At the same time, enterprises need support in integrating and managing the three sustainability dimensions –economic, environmental and social-. The “Sustainable Management Framework” presented above provides the guidelines to create a structured management system that includes also the sustainability perspective.

It seems evident that sustainability issues should be integrated into business considerations and that this requires a "system perspective approach" inclusive of multiple variables deriving from factors both external and internal to the company.

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CHAPTER 2. A NEW WAY OF THINKING ABOUT BUSINESS: CIRCULAR

ECONOMY

“System perspective approach” is necessary not only for strategy and management of a single enterprise, instead it should be expanded to the whole product or service life. Enterprises are facing new challenges regarding sustainability and competitiveness in today’s global context, where competitive advantage stands on a broader and more complex range of external variables, that are determinant for pursuing success and long-term firm survival. Therefore to define business strategies, companies should embrace a common basic approach, which should involve both internal mission and vision and external relationships among economic actors. This is the case for a relatively new way of thinking about economy and consequently business: circular economy.

In the past, “Circular economy”, meaning natural resources’ efficient use, renewable energy utilization and no waste creation, was not a concept, but a practice, often even the only possible way to survive. The Industrial Revolution changed substantially the way of conducting business, thanks to technological innovation and petroleum usage. Furthermore, industrialization, in association with correlated phenomena like massive urbanization and rural population decrease, accelerated the process of humans detachment from environmental ecosystems perspective, while linear industrial model developed and became predominant. Today the world is experiencing an “advanced return to the past”, in the sense that Circular Economy has brought back to the top issues, but this time as a conscious and concrete way of thinking, supported by advanced technologies and better tools that could help people and economic activities to “be less dependent on primary energy and material inputs and be able to regenerate natural capital” (WEF 2014, p. 10).

Hereafter, the emerging model of circular economy will be presented as a possible strategic way for firms to manage sustainability aspects from a broader point of view. Then, the European strategic and legislative framework related to circular economy will be summarized in order to give a panorama about European efforts towards a more circular economic system. Finally, possible managerial tools, useful to comprehensively analyze business activities, will be described and will constitute the essential models for the further textile and clothing sector in-depth analysis.

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2.1 Drivers that Push to Change

The actual background, observed and reported by the World Economic Forum in collaboration with the Ellen MacArthur Foundation and McKinsey & Company (2014), presents two main trends. On one side, pressure on resources is seriously increasing, since world population is growing, expected to reach 9 billion people by 2030, meaning more 3 billion of middle-class consumers; moreover resource extraction costs are rising and consequently commodity prices are higher (from 2002 to 2010, prices increased overall by 150%) and more volatile. Furthermore competition among industries to get finite resources is exacerbating, while recycling levels are still inadequate. On the other side, manufacturing processes are fragmented, as globalization openness has allowed supply chains to spread all over the world, missing important resource and energy saving opportunities. Additional factors to consider are also the rebound effect2 of eco-efficiency, that accelerates energy consumption and resource depletion; slower agricultural productivity growth; decreasing soil fertility and food nutritional values and the robust urbanization phenomenon.

The linear model that have dominated industrial processes until now failed to respond to these alarming problems and it is showing all its limits in effectively contrasting negative trends. The linear pattern of production and consumption refers to the mechanism in which resource are extracted and transformed in goods, products are sold and they finish their life as wastes, incinerated or disposed (WEF, 2014). This “take-make-dispose” system is no longer sustainable and needs global collaboration between companies and institutions to change in the right direction.

At the same time, four crucial enablers are facilitating the necessary transitional process. First, today’s consumers prefer accessing services over owning products, meaning a shift to “sharing economy” that considerably modify lifestyle choices towards collaborative consumption models. Second, urbanization, known as the massive people move to cities, is expected to increase, causing on one hand more resources use and waste collection costs, but on the other hand interesting economies of scale to exploit because of the higher density, such as easier logistics management or more convenient service provisions. Third, advanced industrial and information technologies improve material tracking procedures, knowledge sharing and loop-close

2

Rebound effect refers to a behavioral or systemic response to the introduction of new technologies, that increase resource efficiency. Indeed responses, such as energy consumption or natural and other inputs (i.e. labour) usage, could offset the beneficial effects of the new technology, by intensifying even more resource consumption.